Islamic Contract – Bay’ al-Istijrār: Istijrār With Upfront Payment

Islamic Contract – Bay’ al-Istijrār: Istijrār With Upfront Payment
1. Definition of Istijrār With Upfront Payment
Explanation
This type of istijrār involves:
the buyer paying money upfront to the seller for a specified quantity of goods that will be supplied gradually in stages over time.
Instead of:

• immediate full delivery,

the goods are:

• withdrawn progressively according to need.

Simple Example
A restaurant pays:

• RM100,000 upfront
  to a food supplier for:
• monthly supply of chicken over 1 year.

The supplier then:

• delivers portions gradually every month.

Result
✅ Istijrār with upfront payment.


2. Scholarly Views on Istijrār With Upfront Payment
Majority of Scholars
The majority of scholars:
✅ permit this arrangement,
although they differ regarding:
the fiqh characterization (takyīf fiqhī) of the contract.
Some classify it as:

• salam-like arrangement;
• continuous supply sale;
• hybrid contractual structure.

Shāfi‘ī School
The Shāfi‘ī jurists:
❌ do not permit this form of istijrār.
Why?
Because:

• payment occurs upfront;
• goods are delivered gradually later;
• uncertainty may arise regarding staged delivery.

3. SAC-BNM Approval on Istijrār Trade Financing
SAC-BNM Resolution
The:
Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM)
at its:
194th meeting on 25 June 2019
approved:
a proposed import financing structure based on bay’ al-istijrār.
This approval was specifically for:

• Islamic trade finance facilities;
• Islamic letter of credit financing.

4. Structure of Istijrār Import Financing
The structure generally involves:

• Islamic Financial Institution (IFI);
• importer/customer;
• exporter/supplier.

Chronological Flow of Istijrār Import Financing
STEP 1 — Customer Wants to Import Goods
A Malaysian importer wishes to import:

• industrial machinery from Germany.

Import Value
RM2,000,000
The customer requests:

• Islamic trade financing facility.

STEP 2 — Customer Appointed as Agent
The Islamic bank appoints:
the importer/customer as purchasing agent (wakīl).
The customer now acts:

• on behalf of the Islamic bank
  to purchase goods.

SAC-BNM Requirement
The facility agreement must clearly specify:
the importer’s responsibility as purchasing agent.


STEP 3 — Customer Purchases Goods for Bank
As agent:

• the importer executes purchase transaction with exporter
  on behalf of:
• Islamic bank.

At this stage:
✅ goods are purchased for the bank,
not yet for customer personally.


STEP 4 — Islamic Bank Becomes Owner of Goods
Once purchase completed:
✅ ownership transfers to Islamic bank.
Thus:

• the bank bears ownership risk at this stage.

STEP 5 — Exporter Ships Goods
The exporter ships:

• industrial machinery.

Shipping documents are issued.


STEP 6 — Customer Receives Goods/Documents
The imported goods and/or shipping documents arrive.


STEP 7 — Customer Purchases Goods From Islamic Bank
After agency role completed,
the customer now enters:
separate purchase transaction with the Islamic bank.
This is important because:

• agency role must finish first;
• customer cannot simultaneously act as:
  • purchasing agent;
  • purchaser.

SAC-BNM Requirement
The IFI must ensure:
proper sequencing of transactions.
Meaning:

1. agency purchase first;
2. customer purchase from bank second.

STEP 8 — Customer Pays Bank
The customer pays:

• agreed financing price;
• either deferred or instalment basis.

Example With Figures
Import Cost Paid by Islamic Bank
RM2,000,000
Selling Price to Customer
RM2,300,000


Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000


5. Why Proper Sequencing Is Important
Incorrect Structure
If customer:

• purchases goods before agency role completed,

then:

• contracts may overlap improperly;
• ownership transfer becomes unclear;
• Sharī‘ah issues may arise.

Correct Structure
Sequence Must Be:

1. Customer acts as agent for bank.
2. Bank acquires ownership.
3. Customer later buys goods from bank.

6. Risks and Liabilities
The agreement must clearly determine:

• who bears ownership risk;
• liabilities at each stage.

Example
Before Customer Purchases From Bank
✅ Bank bears ownership risk.


After Customer Purchases From Bank
✅ Customer bears ownership risk.


7. Why SAC-BNM Allowed This Structure
SAC-BNM approved this structure because:

• modern trade finance requires practical import financing solutions;
• continuous supply financing is commercially needed;
• the structure facilitates Sharī‘ah-compliant international trade.

However:
the approval is confined specifically to the proposed trade finance structure.


Important Sharī‘ah Principle
Istijrār financing is permissible only if:
✅ proper ownership transfer occurs;
✅ agency and sale contracts are separated;
✅ sequencing is properly maintained;
✅ ownership risks are genuinely borne by the correct party.
Otherwise:
❌ the arrangement may resemble conventional interest-based financing.

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